NIGERIA: ECONOMIC ROUNDUP DECEMBER 19

UNCLAS SECTION 01 OF 03 ABUJA 003345 SIPDIS SENSITIVE STATE FOR AF/W STATE PASS USTR STATE PASS DEPARTMENT OF ENERGY E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD ECPS NI SUBJECT: NIGERIA: ECONOMIC ROUNDUP DECEMBER 19 REF: A. ABUJA 3323 ¶B. ABUJA 2961 ¶C. ABUJA 1194 ¶D. LAGOS 655 ¶E. 01 ABUJA 997 (U) 1. This periodic economic report includes: --GON Announces Financial Bids to Privatize Five SOEs --GON Plans for Debt Management in 2003 --Backroom Deals May Derail Another Motorola Bid --Central Bank Scolds Banks on Lending Practices --Supreme Court Says States Control Local Gov't Funding GON Announces Financial Bids to Privatize Five SOEs -------------- -------------- ¶2. (U) Bureau of Public Enterprise (BPE) officials opened financial bids for the privatization of five state-owned enterprises (SOEs) December 12 at the NICON Hilton Hotel in Abuja: National Trucks Manufacturers, Savannah Sugar, Caterers Court (apartments),Nigeria Re-Insurance, and Abuja International Hotel (built for, but never operated, by Sofitel). ¶3. (U) Art Engineering and Construction Limited--with technical partners Chinese Civil Engineering and Construction Corporation, China FAW Corporation, and Dongfeng Corporation--bid $6.4 million for a 51 percent share in National Trucks Manufacturers. The reserve bidder was Danata Investment and Security Company Limited, with technical partner Eicher Group of India. ¶4. (U) Dangote Industries Limited was named the preferred bidder for a 51 percent share in Savanah Sugar, with an offer of $6.3 million. Sahara Energy Resource bid $5.1 million for Caterers Court and was named the preferred bidder. Reinsurance Acquisition Group Limited made a winning bid of $7.8 million for 51 percent of Nigeria Re-Insurance. Both bidders on Abuja International Hotel were disqualified for failure to pay a mandatory $2 million bid bond. ¶5. (U) The opening of the financial bids was the third in a four-step privatization process. The first was a prequalification exercise that BPE conducted based on potential investors' expressions of interest. Next, BPE reviewed the technical bids of those investors who were prequalified. The fourth step is for each winning bidder to pay the full bid price to the BPE, based on a payment schedule negotiated between BPE and each bidder. ¶6. (U) Comment: It is this fourth step, payment of the winning bid price, where the privatization process often breaks down. Privatization of Nigeria Telecommunication Limited (NITEL),Niger Dock, and more recently the NICON Hilton Hotel failed because winning bidders could not come up with the funds to pay their bid prices. Septel will provide more details on the privatization process. End Comment. GON Plans for Debt Management in 2003 -------------- ¶7. (U) Director General of the Debt Management Office (DMO) Akin Arikawe on December 9 told Econoff that, after a difficult year for debt repayment in 2002 due to budget shortfalls, the GON plans to buydown all non-Paris Club debt in 2003 and reschedule Paris Club debt in 2003 or 2004. Decreased government revenues--together with confusion over the division of Paris Club debt among the States and Federal Government--means the GON will pay only $900 million of the $1.5 billion budgeted for external debt in 2002. Arikawe says the GON will use that $900 million to stay current with its London Club, multilateral, and promissory note debt, but will probably make no further Paris Club payments this year. ¶8. (U) The Central Bank has agreed to release $500 million from the 2003 budget early so the GON can buy back most of its London Club debt (par bonds) this year. This will reduce next year's payment for this item from $130 million to approximately $25 million. The Bank hopes for a similar auction of promissory notes to reduce non-Paris Club annual debt payments to approximately $400 million. Arikawe says this scheme would leave the GON with about $1 billion to use in its rescheduled debt payment program with the Paris Club. ¶9. (U) Comment: Arikawe may be overly optimistic (Ref. A). There is a certain logic to his strategy, but it hinges on budgetary discipline as well as the acquiescence of Paris Club debtors to standing at the back of the line of Nigerian creditors. End Comment. Backroom Deals May Derail Another Motorola Bid -------------- - ¶10. (SBU) Motorola Country Director for Nigeria Raphael Udeogu expressed to Econoff concern that his company's $230 million bid to expand Nigeria Telecommunication Limited's (NITEL) GSM infrastructure is not being treated fairly by the GON. He claimed that NITEL initially disqualified two of six companies competing for the contract--Siemens and Huawei--for improper bid submission. Meanwhile, NITEL disclosed technical and financial details from the four remaining bids. ¶11. (SBU) A few days later, NITEL re-instated the German and Chinese companies' bids. According to Udeogu, NITEL officials first gave the flimsy excuse that the bids were reinstated because necessary forms could not be properly downloaded from the internet. Later, when that explanation lost credibility, officials simply said "the decision was from above," implying the hand of the Minister of Communications Mohammed Bello. Udeogu reports that NITEL purposefully modified contract requirements to use Siemens' proprietary technology for some technical specifications, giving that company a tremendous and unfair advantage. ¶12. (SBU) Udeogu expects NITEL to announce the shortlist for the contract in early January. He predicts NITEL will divide the contract award among several companies, with the largest share going to Siemens. ¶13. (SBU) Pursuant to Motorola's request, Post continues to provide advocacy assistance for this bid. In a letter to President Obasanjo dated December 2, Ambassador Jeter made an overture for improved transparency in the privatization and regulation of the telecommunications sector, specifically mentioning the concerns of U.S. companies such as Motorola. (Note: A copy of this letter has been faxed to AF/W. End Note.) Central Bank Scolds Banks on Lending Practices -------------- - ¶14. (U) Local press reported that ten banks will contest the Central Bank over the latter's order that the banks refund about 524 million naira ($4 million) to African Petroleum Plc. (AP) for excess charges on loans to AP at a time when that company was clearly a poor credit risk. AP has since declared bankruptcy. A December 8 article in the Lagos-based "Vanguard" newspaper said the Central Bank calculated these charges amounted to 524 million naira on a 14 billion naira ($108 million) credit facility extended to AP. ¶15. (SBU) While the "Vanguard" implicated 17 financial institutions, a senior banking executive told Lagos Econoffs that two additional institutions are involved. Our source stated that some institutions extended credit to AP exceeding 30 percent of their shareholder capital, thus contravening Central Bank regulations. Our source added that some of the credit was disguised as off-balance-sheet financing in the form of loan commitments or guarantees that do not add debt on a balance sheet. ¶16. (SBU) Our source reports another alarming aspect of these transactions on which the Central Bank has not yet focused: AP denies owing 11 billion ($85 million) of the 14 billion naira credit facility extended to it. Essentially, that 11 billion naira is missing. Our source added that one of AP's former principals now has about $37 million in two accounts managed by a large U.S. investment firm, implying that some of the missing 11 billion naira may be found there. A second source says that both AP executives and banking principals may have benefited from these transactions. ¶17. (SBU) Comment: Given the Central Bank's punitive leverage over the financial sector and its willingness to use that authority (Ref. D),the banks will likely repay AP rather than risk sanctions. This controversy may presage a more active role by the Central Bank in rectifying banks' improper lending practices. However, we would not be surprised to see those involved call in political favors to see that Central Bank investigators are held at bay. End Comment. Supreme Court Says States Control Local Gov't Funding -------------- -------------- ¶18. (U) The Nigerian Supreme Court in a December 13 unanimous decision ruled that revenue now being passed directly to the local governments by the federal government must first pass through state governments. This will further strengthen the political and economic control of state governors and weaken central government influence over local government. In a blow to states' attempts to enhance their revenues, however, the Supreme Court rejected states' claim to a percentage of proceeds from privatization, stamp sales, and other federal government activities. ¶19. (U) Comment: Despite the April 5 Supreme Court decision on resource and revenue allocation (Refs. C and E), implementation has been slow and marked by efforts by "the losers" on any given revenue allocation issue to restore the status quo ante. There will be numerous political fights before these issues are finally settled, so the financial impact of these two rulings cannot yet be assessed. End Comment. JETER